A by-product of state-mandated retirement legislation, CalSavers is designed to improve the financial security of Californians working in the private sector. It also presents an opportunity for small business owners who otherwise wouldn’t have been able to afford the overhead or administrative costs of a retirement plan to keep employees engaged and attract new talent.
What is CalSavers?
CalSavers is a retirement savings program sponsored by the State of California, facilitated by businesses and funded by employee savings. It has no employer fees or fiduciary responsibility and minimal administrative upkeep, making it relatively simple for businesses to participate.
How does the CalSavers program work?
California law requires employers who don’t already offer retirement benefits to either enroll their employees in CalSavers or sponsor a qualified retirement plan on their own. If the state-run option is chosen, employees contribute to the plan via payroll deductions and can take their savings with them if they change jobs throughout their career, a feature commonly known as portability.
What businesses qualify for the California retirement savings program?
Employers that have at least five full- or part-time employees based in California may participate in CalSavers, or they can choose another retirement savings provider option. This eligibility applies to both for-profit and non-profit businesses.
Is CalSavers mandatory for employers and employees?
Participation in CalSavers is voluntary for employers. However, those who qualify but decline to join the program must sponsor a retirement plan through the private market or risk penalization. CalSavers is optional for employees, as well, and if enrolled by their employer, they may opt out at any time.
What are the registration deadlines?
Eligible businesses can register for CalSavers at any time, as long as they meet one of the following deadlines:
- Eligible employers with more than 100 employees – September 20, 2020
- Eligible employers with more than 50 employees – June 30, 2021
- Eligible employers with five employees or more – June 30, 2022
Business size is based on the average number of employees reported to the Employment Development Department on the four DE9C filings from the previous year.
What type of retirement plans are available?
CalSavers is available as a Roth individual retirement account (IRA). This means that employees contribute to the program via payroll deductions on a post-tax basis, but when they retire, their income from the savings account is generally tax free. An option is also available for CalSavers participants who want to recharacterize their account to a traditional IRA. With this type of plan, contributions are made pretax and are then taxed at the time of withdrawal.
Who can contribute to CalSavers?
Only employees, not employers, may contribute to CalSavers. Those who qualify generally:
- Are 18 years of age or older
- Have employee status under Unemployment Insurance Code Section 621
- Receive a Form W-2, Wage and Tax Statement with California wages from an eligible employer
- Are a sole proprietor or partner in a partnership that is an eligible employer
Individuals may also be able to participate in CalSavers independent of their employer, in which case they need to:
- Meet the age requirement
- Have a source of income and a bank account
- Provide all personal information required to administer the program
- Make an initial contribution as low as $10 (recurring contribution options available)
What investment options are available?
Employees contribute to the CalSavers Money Market for 30 days following their enrollment, after which, they have two options. They can either let their initial savings and all future investments automatically transition to a CalSavers Target Retirement Fund based on their age and expected date of retirement. Or, they can customize their investments and choose from one of the following:
- Sustainable balanced fund
- Core bond fund
- Global equity fund
- Money market fund
Does the plan offer auto-enrollment?
Employees who work for eligible employers are automatically enrolled into CalSavers at a default contribution rate of 5%, which increases 1% each year up to an 8% maximum. At any time, they can change their contribution level and rate of increase or opt out of the program altogether.
Are there penalties for non-compliance?
California will serve failure-to-comply notices to any eligible employer who doesn’t join CalSavers by the appointed deadline or offer a qualified retirement savings program independently. If the business fails to comply within 90 days from receiving this notification, the state will fine it $250 per employee. After 180 days, the penalty increases by $500 per employee, for a total of $750 per employee.
Employer responsibilities under CalSavers
Although CalSavers is designed to keep administrative burdens at a minimum, employers do have some responsibilities with this type of plan. They typically have to:
- Register and add all participant data for eligible employees
- Provide program information to all current and new employees (optional)
- Manually enroll participants and make annual auto increase deferral adjustments
- Submit and track payroll contributions
- Track and honor opt out requests
Are there any restrictions for employers?
Unlike some other types of retirement plans, employers who have registered with CalSavers may not match employee investments or make non-elective contributions. The state also prohibits them from:
- Providing advice to employees about investment options
- Managing employee investments or account information on their behalf
- Persuading employees to opt out of CalSavers
- Deducting contributions from nonparticipating employees
Do California businesses have to use the state-sponsored retirement program?
As previously mentioned, participation in CalSavers is voluntary for eligible businesses as long as they offer another qualified retirement plan, such as:
- 403(a) Qualified Annuity Plan or 403(b) Tax-Sheltered Annuity Plan
- 408(k) Simplified Employee Pension (SEP) plans
- 408(p) Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA Plan
- 401(a) Qualified Plan (including profit-sharing plans and defined benefit plans)
- 401(k) plans (including multiple employer plans or pooled employer plans)
- Payroll deduction IRAs with automatic enrollment
What are the pros and cons of CalSavers for employers?
CalSavers is convenient and affordable for employers and it allows employees who otherwise wouldn’t have access to retirement benefits to save for the future. Yet, it’s not without its faults. Compared to other retirement plans, CalSavers offers fewer investment options and the maximum amount that employees can contribute per year is far less. Plan participants may also be charged between 0.825 and 0.95% in investment fees and state and administrative fees.
Frequently asked questions about CalSavers
Why is California sponsoring their own retirement plan?
California is one of several states sponsoring their own retirement plan to address the looming retirement savings crisis. Plans like CalSavers were enacted based on studies that show only 28% of business with less than 10 employees provide retirement benefits.1
When did CalSavers start?
The California state government officially launched CalSavers in July 2019 as part of a phased rollout over three years. The first phase required eligible businesses with more than 100 employees to register, followed by those with more than 50 employees and finally, employers with five or more employees.
Is CalSavers legal?
CalSavers has faced legal challenges, but the Ninth Circuit Court of Appeals ruled in favor of the state-run program on May 5, 2021 and on June 15, 2021 denied the appellant’s request for rehearing.
Can self-employed persons participate in CalSavers?
Although they are under no requirement to offer retirement benefits, employers with fewer than five people may join CalSavers. This includes sole proprietors and partnerships.
1Planadviser: Small Business Owners Need a Nudge to Offer Retirement Plans, April 2019
This information is intended to be used as a starting point in analyzing state-mandated retirement plans and is not a comprehensive resource of all requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.
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